The House of Representatives passed a new tax bill proposing an increase in the federal deduction cap on state and local taxes (SALT) to $40,000. This is a significant jump from the current limit of $10,000. The measure is part of an ongoing effort since the Tax Cuts and Jobs Act of 2017, which originally set the $10,000 cap.
Legislators from high-tax states such as New York, New Jersey, and California argue that the current cap unduly burdens residents. The House provision aims to lift the cap and provide some financial relief. If enacted, the higher SALT cap would go into effect in 2025 and phase out for incomes over $500,000, with annual increases of 1% from 2026 through 2033.
The top tax rate, which affects individuals with taxable incomes above $626,350 and married couples earning more than $751,600, might see reduced itemized deductions. This could potentially diminish the benefits of the higher SALT cap. When filing taxes, individuals choose either the standard deduction or itemized deductions, which include SALT capped at $10,000 along with medical expenses above 7.5% of adjusted gross income.
House raises SALT cap proposal
The Tax Cuts and Jobs Act doubled the standard deduction starting in 2018, with adjustments for inflation. For 2025, the standard deduction stands at $15,000 for single filers and $30,000 for married couples filing jointly.
Currently, most taxpayers benefit more from the standard deduction due to its size compared to itemized deductions. However, lifting the SALT cap is seen as advantageous mainly to higher earners. Garrett Watson, Director of Policy Analysis at the Tax Foundation, noted that with an income phaseout over $400,000, the top 20% of taxpayers are the ones who would benefit the most.
Despite this, some members of the “SALT Caucus,” such as Rep. Josh Gottheimer (D-NJ), argue that increasing the cap or fully repealing the limit would significantly benefit middle-class families in high-tax districts, offering considerable tax relief. As the debate continues, the potential changes to the SALT deduction cap and their implications will be closely watched by both lawmakers and taxpayers.
The proposal might still undergo changes in the Senate.